An empirical investigation of Greek firms' compliance to IFRS disclosure requirements

40 Int. J. Managerial and Financial Accounting, Vol. 2, No. 1, 2010

Copyright © 2010 Inderscience Enterprises Ltd.

An empirical investigation of Greek firms’ compliance to IFRS disclosure requirements

Apostolos A. Ballas* and Christos Tzovas Athens University of Economics and Business, 76, Patission str, 10434, Athens, Greece E-mail: [email protected] E-mail: [email protected] *Corresponding author

Abstract: This study investigates the compliance of Greek firms to IFRS disclosure requirements. Using a checklist based on the disclosure requirements contained on the proposed standard for SMEs, a compliance score was calculated for a sample of 32 listed and non-listed Greek firms. Subsequently, univariate tests and a multivariate regression model were run to investigate what firm characteristics (listing status, sector, size, profitability) may be related to the extent of compliance. On average, firms comply with about two-thirds of the disclosure requirements. Compliance is positively and significantly influenced by listing status, while the univariate analysis indicated that the larger firms exhibit higher compliance rates. Results are of particular interest to accounting regulators who set disclosure requirements and capital market participants. However, the small size of the sample limits the power of the statistical analysis. The paper empirically investigates the compliance with IFRS requirements and ultimately on the quality of financial statements.

Keywords: compliance; disclosure; International Financial Reporting Standards; IFRS; Greece.

Reference to this paper should be made as follows: Ballas, A.A. and Tzovas, C. (2010) ‘An empirical investigation of Greek firms’ compliance to IFRS disclosure requirements’, Int. J. Managerial and Financial Accounting, Vol. 2, No. 1, pp.40–62.

Biographical notes: Apostolos Ballas is at the Department of Accounting and Finance of the Athens University of Economics and Business, Greece. He obtained his PhD at the London Business School (LBS) and has worked at the Athens Laboratory of Business Administration (ALBA), the University of Piraeus and the University of Cyprus. His research interests are in the areas of accounting regulation, accounting and capital markets, accounting history and auditing. He has published in various leading journals including Accounting, Organization and Society, Contemporary Accounting Research, the European Accounting Review and the British Accounting Review and has co-authored two accounting textbooks.

Christos Tzovas is at the Department of Accounting and Finance of the Athens University of Economics and Business, Greece. He obtained his PhD at Dundee University and has worked at the Agricultural Bank of Greece. His research interests include financial accounting, accounting regulation, and taxation. He has published in various journals including Managerial Auditing Journal, Managerial Finance, Global Business and Economics Review.

An empirical investigation of Greek firms’ compliance 41

1 Introduction

This paper investigates the extent of Greek companies’ compliance to disclosure requirements laid out in various International Financial Reporting Standards (IFRS) as well as some of the factors that may explain compliance. The disclosures included in published financial statements of sample of 32 Greek firms have been examined. In order to compare the extent of compliance of listed vs. non-listed firms the sample consists of 16 listed and 16 non-listed firms. The firms included in the sample are representative of the main sectors of the Greek economy.

The Greek context offers a particularly fertile environment for such a study. In recent years the accounting environment in Greece, as in other EU countries, has experienced a structural transformation; from 1 January 2005 onwards listed companies in all EU countries have had to prepare their financial statements in accordance with IFRS including their detailed disclosure requirements. Laws 2992/2002 and 3229/2003 provided that from the fiscal year 2005 onwards, all listed firms as well as non-listed ones whose financial statements were consolidated in the financial statements of listed firms have the obligation to prepare their financial statements according to IFRS. Other non-listed firms could, voluntarily, prepare their financial statements on the basis of IFRS.

In Greece, as in many European countries (e.g., France, Italy), the ownership structure of the majority of the firms is characterised by a high level of concentration (Nobes and Parker, 2000). In most cases, the owners are actively involved in their companies’ administration by occupying important posts within the organisational structure of their firms (OECD, 1995; Makridakis et al, 1997; Sykianakis, 2004). Managers in such firms can communicate information regarding firm’s performance directly to their superior owner-managers without having to rely upon financial statements. Under these circumstances, there are no strong incentives for firms to provide high quality of financial disclosure.

The main providers of funds for Greek companies are the banks. The dominant role of the bank credit in the financing of business enterprises is a distinct characteristic not only of the Greek business environment, but also of many other European countries (e.g., France, Germany). Banks developed a close relationship with many companies, while in certain cases they own part of the firm’s share capital. Thus, banks in many instances may directly obtain any relevant financial information, without having to rely upon publicly disclosed data. It has been argued that the fact that financial accounting in many European countries has been dominated by tax regulations and has never developed to a genuinely independent branch of accounting can be partially attributed to the fact that when ‘…even listed companies in continental countries are dominated by banks, governments or families, the need for published information is less clear’ [Nobes and Parker, (2000), p.21]. Consequently, the importance of public accounting information may further diminish. Within this context, there demand for high quality disclosure is not expected to be high.

Greece has been classified as a code-law country with low protection of investors’ rights. It is expected, therefore, that the disclosure compliance would not be particular high. Furthermore, in Greece there is a close linkage between tax accounting and financial reporting, factors that does not contribute in high disclosure compliance. Since financial statements are not required as information source for owners, companies can

42 A.A. Ballas and C. Tzovas

adopt aggressive tax-reducing strategies (Tzovas, 2006), including creative accounting (in particular relating to the balance sheet) (Baralexis, 2004). Indeed, Leuz et al. (2003) show that Greek companies appear to engage in some of the most extreme earnings management practices in the world. Bhattacharya et al. (2003) provide similar evidence, since in their study Greek firms are the most engaged in earnings management among firms from 34 countries. Further evidence is provided by Koumanakos (2007). A further cause of creative accounting is poor enforcement and poor creditor and investor protection, common in French-style civil law countries which include Greece (Chalevas and Tzovas, 2009), poor legal protection of investors also appears to correlate with high ownership concentration (La Porta et al., 1998). On the basis of the above analysis we expect that the compliance of Greek firms with the disclosure requirements prescribed by IFRS would not be particularly high.

Greek culture may also influence the disclosure behaviour of Greek firms. Greece is considered to be a low trust society with a strong element of individualism and a strong preference for state regulation (Ballas et al., 1998), which in the case of accounting manifests in the form of detailed rules over principles and economic substance (Ballas et al., 1998). In addition, large power distances and uncertainty avoidance characterise Greek society (Ballas et al., 1998). The impact of these cultural factors means that Greek firms will prefer confidentiality over transparency. Confidentiality will have a direct impact on the level of information disclosure by firms (Alexander et al., 2003).

The benefits ensuing from the adoption of IFRS mainly relate to the quality of information provided to the users of firms’ financial statements. The financial statements prepared according to IFRS are supposed to provide a faithful representation of firm’s financial position and financial performance by assigning importance to the economic substance of events. Tax considerations have no impact on the financial statements prepared according to International Accounting Standards (IAS), given that under IFRS financial statements are only prepared for financial reporting purposes. The more complete and analytical are the disclosures made in the financial statements, the easier it is for the investors and other users of firm’s financial reports to evaluate its financial position and financial performance.

Thus, the clash between an environment that does not favour disclosure and the economic arguments in favour suggests that an investigation of the compliance of Greek firms should be interesting to a wider audience of regulators, investors and creditors. It should be noted that the word ‘compliance’ is used here in a strict sense, compliance to the requirements of a law whereas most previous disclosure studies examined voluntary disclosures.

The findings of this study suggest that the level of compliance of Greek firms to the disclosure requirements of the IFRS is far from perfect. However, non-listed appear to significantly differ from listed ones with respect to their conformity to the IFRS’s disclosure requirements. Furthermore, the findings of the univariate analysis suggest that size is a significant factor explaining compliance while both univariate and multivariate analysis indicate that sector classification and profitability have limited explanatory power.

The results of this study provide some evidence whether the introduction of IFRS improved the quality of the published financial statements prepared by Greek firms. On average, annual reports are thicker than those published when financial statements were produced using the Hellenic General Accounting Plan. Inter alia, this suggests that more information is provided.


The rest of this paper proceeds as follows. Section 2 discusses the literature on the importance of companies’ disclosures, the impact of IFRS upon firms’ financial statements, the degree of firms’ compliance to IFRSs’ disclosure requirements, and the association between firms’ characteristics and their compliance to disclosure requirements. In Section 3 we develop the hypothesis to be tested while in Section 4 the sample and the research design followed in this article are described. Section 5 reports the results of the empirical investigation undertaken for the purposes of this study. Section 6 summarises and concludes the paper with suggestions for further research.

2 Literature review: the importance of corporate disclosure

Firms convey information to the investors regarding their financial position and performance through the published financial statements. Accounting information can be considered as a public good, given that shareholders undertake the cost of providing this information, while other categories of potential investors can use this information for free. Within this context is likely that the production of accounting information may not be up to the optimum level. This inefficiency of the information production mechanism can be treated through the introduction of regulations that impose to firms a certain level of compulsory disclosure of accounting information (Leftwich, 1980; Watts and Zimmerman, 1986; Beaver, 1998).

This regulatory framework is expected to protect the interests of non-sophisticated investors. By imposing a minimum level of disclosure the informational gap between informed and less informed investors is supposed to narrow (Leftwich, 1980; Watts and Zimmerman, 1986; Beaver, 1998). Healy and Palepu (2001), argue that the provision of adequate accounting information enhances the efficient function of capital markets.

Ceteris paribus, managers of the firms have a better insight, comparing to investors, concerning the value of the investment projects that they aim to undertake. This information asymmetry can hinder the smooth functioning of capital markets. When market participants cannot differentiate between sound business proposals and those that they are less promising, they will tend to value both of them the same. As a consequence, the market will systematically undervalue the good business proposals. It is likely, therefore, that the market will be dominated by weak investment proposals. The imposition of a compulsory level of corporate disclosure is expected to reduce the informational gap between managers and investors and as a result to contribute to the efficient functioning of capital markets.

Due to the different frameworks of accounting principles that prevailed in each country until the 90’s, the financial statements of companies from different countries were not easily comparable. In order to make relevant investment decisions, it was necessary to reconcile the financial statements prepared under certain jurisdiction according to the provisions of the accounting standards that prevailed in another country. The reconciliation costs were so high that the need for international harmonisation of accounting standards became evident. The harmonisation of accounting standards would allow investors to use financial statements from different countries without having to deal with issues relating to different accounting treatment of the same events or different disclosure requirements. According to Carey (1990) investors and analysts are expected to benefit from the harmonisation of accounting standards, given that it would be less


costly to make the appropriate comparison between corporations that operate in different countries (see also, Epstein and Mirza, 2001). Consequently, the harmonisation of accounting standards will facilitate investors and financial analysts in making better investment decisions with lower risk.

There have been alternative approaches regarding accounting harmonisation. According to Mathews and Perera (1996), harmonisation is a procedure of adjustment of different systems of presenting accounting and financial information, so that the resulting set of principles is more standardised with respect to the presentation of accounting information, although its content retains significant levels of differentiation.

Wolk and Heaston (1992) argue that harmonisation is a procedure that aims to reduce the differences between the standards prevailing in different countries with respect to accounting and financial disclosure. Diga (1996) maintains that the harmonisation of accounting disclosure aims to achieve a convergence towards a particular mode of disclosure.

Emenyonu and Gray (1996), investigated whether there are significant differences in the disclosure practices applied in five developed countries, i.e., Japan, the USA, France, Germany and UK. Significant differences have been observed in the following items: business combinations, income statement, exchange differences, foreign exchange transactions, pension schemes, long-term contracts and government grants. Insignificant differences have been found with respect to the disclosure relating to the following elements: long-term investments, borrowing costs, and extraordinary items.

2.1 Compliance with IFRS disclosure requirements

IFRS set particular disclosures requirements for each particular IFRS. Cairns (1999) and Street et al. (1999) provide evidence which suggests that the degree of compliance of firms to the disclosure requirements of IFRS varies. Street et al. (1999) investigated the extent to which firms claim to comply with the valuation rules and the disclosure requirements prescribed by IAS, and the nature and the importance of the non-compliance of firms. Their sample consists of the financial statements of 49 large firms from 12 countries for the year 1996. They found that only 20 firms comply with all IAS. The most common areas of non-compliance include: the capitalisation of cost of capital, the lack of full disclosure of information concerning tangible and intangible assets, the disclosure of information concerning hyperinflationary economies.

A number of studies aimed to measure the extent of the de jure harmonisation in various settings. Agami and Monsen (1995) in order to measure the degree of accounting harmonisation in Scandinavia compared the accounting standards applied in Scandinavia with the EU directives concerning accounting, and the IAS. The findings of that study suggest that companies in Scandinavia have achieved a satisfactory level of accounting harmonisation, while the accounting standards are consistent with the IAS. Garrod and Sieringhaus (1995) measured the level of formal harmonisation between the UK and the German accounting standards covering financial leases. The results indicated that the valuation rules applied in the two countries regarding the leased assets were significantly different. Rahman et al. (1994) examined the formal harmonisation between the Australian and New Zealand’s accounting standards. They concluded that there are considerable similarities in the accounting standards of the two countries.


The contention that the introduction of IFRS increases the quality of the published financial statements is not unanimously adopted. For instance, Fearnley and Hines (2002) have pointed out that the EU has not immediately adopted IAS 39, while it finally adopted it after a prolonged period of negations and compromises. Similarly, they criticise IFRS for not dealing with the issue of the substance of transactions and they highlight the difficulties that are related with the accounting for mergers and acquisitions as this prescribed by the IFRS. Furthermore, they maintain that the implementation of IAS 19 (employee benefits) and IAS 12 (deferred taxation) is quite cumbersome in practice. Similarly, Larson and Street (2004) argue that certain IFRS can be rather complicated, while the lack of guidance for the first implementation of certain IAS are factors that hinder the process of accounting harmonisation.

In spite of the reservations that have been expressed with respect to the applicability of IFRS, Caldwell (2004) argues that the introduction of IFRS will improve the quality of the information content of financial statements. A recent research study of KPMG (2009) has indicated that the majority of American financial analysts believe that the introduction of IFRS in the US will improve, in the long run, the quality of corporate disclosure while it will enhance the comparability of firms’ financial statements. It is crucial, however, to investigate the extent of the compliance of firms to the provisions of IFRS. Saudagaran and Diga (1997) and Frost and Ramin (1997) have found considerable variation with respect to the accounting policies implemented by firms in countries that have adopted IAS. A number of studies have identified significant non-compliance with the disclosure requirements of IFRS (see, Hodgdon et al., 2008; Glaum and Street, 2003; Street and Bryant, 2000; Street and Gray, 2001; Street et al., 1999).

A number of studies have examined the implementation and compliance of IFRS in the years under the new mandate. It has been argued that the compliance of European firms with a single set of accounting standards will reduce the differences in accounting practices across Europe (Nobes, 2006). A study conducted by the Institute of Chartered Accountants in England and Wales (2007) on behalf of the European Commission suggests that in general the publicly traded firms in the European Union comply with IFRS. However, it is likely that the different institutional environment prevailing in European countries will continue to bring about different accounting practices (Ball, 2006; Nobes, 2006; Glaum, 2009). Studies by KPMG (2005) and Ernst & Young (2006) conclude that, despite convergence, IFRS compliance is heterogeneous and country specific. Glaum et al. (2007) provide evidence that suggests that compliance with IFRS mandated disclosures differs across European countries with compliance rate ranging from 13% to 100%. Fekete et al. (2008) found that the disclosure compliance rate for Hungarian firms is on average 62% (ranging from 25% to 88%).

More recent studies suggest that the degree of a firm’s conformity with the disclosure requirements prescribed by a standard is associated with a number of factors. Specific firm characteristics and basic attributes of the broader environment within which the firm operates affect the compliance of a corporation to standard requirements. The influence of company characteristics on accounting information disclosed by firms is discussed in next section. The characteristics of the broader environment that influence disclosure compliance can be classified into institutional and cultural (Camfferman and Cooke, 2002). The institutional factors include the legal system, capital markets, and tax. Cultural values such as individualism, power distance, uncertainty avoidance and masculinity may influence disclosure compliance (Gray, 1988).


The legal and political system prevailing in a country affects disclosure compliance through enforcement of accounting standards and litigation against managers and auditors (Soderstrom and Sun, 2007). La Porta et al. (1998) provide evidence that legal enforcement is higher in common law countries. Empirical research has found that disclosure quality is higher in common law countries and in countries with high protection of shareholders rights (Ali and Hwang, 2000; Leuz et al., 2003). Given that the IASB does not have enforcement powers, the issue of legal enforcement is particularly important with respect to the compliance to the disclosure requirements prescribed by IFRS (Soderstrom and Sun, 2007). The security exchange committees and the courts have the power to enforce the compliance with disclosure requirements of IFRS (Schipper, 2005). Furthermore, the fact that the IFRS are principles-based means that accountants and auditors have to follow general principles rather than detailed guidelines and to adapt these principles to specific situations (Ball, 2006). Thus, in situations which are not prescribed by an IFRS and an interpretation of principles is necessary, the legal system has a crucial role in enforcing disclosure compliance (Soderstrom and Sun, 2007).

The structure of the capital markets and the sources of financing of firms operating in a country are factors that can influence the disclosure compliance. The demand of information from market participants forces firms’ managers to improve the quality of accounting disclosure (Soderstrom and Sun, 2007). In order to reduce their cost of capital the firms that are in need of external financing are more likely to disclose more accounting information (Francis et al., 2005). In countries with high protection of investors’ rights it is likely that disclosure compliance will be higher (La Porta et al., 1998, 2006). It should be pointed out, however, that the providers of external financing do not have the same information needs, since shareholders and creditors use different methods to reduce information asymmetry (Soderstrom and Sun, 2007). Shareholders rely mainly on firms’ financial statements in order to acquire the necessary information. On the other hand creditors, such as banks, are less dependent upon financial statements information since they have direct access to firm managers (Sun, 2006). Sun (2006) provide evidence that the importance of financial accounting information is negatively associated with the level of debt financing. Within this context, it likely to expect that the disclosure compliance will be lower for firms which are dependent upon bank financing.

Firm’s ownership structure has been hypothesised to be associated with the disclosure compliance of a firm (Soderstrom and Sun, 2007). For those firms in which ownership is concentrated in the hands of a relatively small number of shareholders who actively control the firm’s management managers can communicate any information directly to shareholders without having to use published financial statements (Klassen, 1997). As a result lower disclosure compliance is expected for closely held firms.

In countries where tax accounting and financial accounting coincide the disclosure compliance is not expected to be high. The close linkage between accounting standards and tax regulations means that accounting standards serve political purposes such as the collection of taxes (Soderstrom and Sun, 2007). Moreover, when high tax rates prevail in a country firms have a stronger incentive to reduce taxable income and hide accounting profits. Burgstahler et al. (2006) found that European firms operating in countries where there is tax and financial accounting conformity and high tax rates prevail are more inclined to get involved in earnings management.


3 Hypothesis development

Empirical studies of disclosure compliance usually employ agency theory, signalling and capital needs theory models (Abd-Elsalam and Weetman, 2003). It has been argued that firms aim to reduce their agency costs (Jensen and Meckling, 1976) by issuing accounting reports and by increasing the information disclosed in financial statements (Marston and Shrives, 1996). According to the signalling theory, the existence of information asymmetry between firms and investors may result to the problem of adverse selection (Akerlof, 1970). Thus, firms may disclose financial information in order to influence investors’ decisions (Morris, 1987; Inchausti, 1997). According to the capital needs theory, the main incentive for companies’ disclosures is their need to raise capital in favorable terms (Abd-Elsalam and Weetman, 2003). Firms believe that greater financial disclosure will reduce investor uncertainty and reduce the cost of capital (Cooke, 1993). The compliance with disclosure requirements provided by the prevailing legislation and accounting standards reduces the cost of capital of a firm (Abd-Elsalam and Weetman, 2003).

It has been argued that the mandatory adoption of IFRS will result in significant capital-markets benefits for firms, since IFRS reporting increases transparency and improves the quality of financial reporting (Daske et al., 2008). Hail and Leuz (2006) found evidence which suggests that more extensive accounting disclosure and higher quality reporting are negatively associated to firms’ implied cost of equity capital. The mandatory adoption of IFRS makes the less costly for investors to compare firms across markets and countries (Armstrong et al., 2007). Consequently, the introduction of IFRS will facilitate the integration of capital markets and the movement of capital across countries (Covrig et al., 2007), which in turn reduces the cost capital (Daske et al., 2008). Vrentzou (2005) did not find a significant association between the cost of capital of Greek firms and the level of voluntary disclosure.

Political costs are another factor that may influence the disclosure behaviour of a firm. Firms that have high political visibility, and as a consequence may face high political costs, may use accounting information in order to reduce their political visibility and their political costs (Inchausti, 1997).

A number of studies investigated the association between certain firms’ characteristics and the extent to which they comply with the disclosure requirements of IAS (see, Street and Bryant, 2000; Glaum and Street, 2003). The characteristics of the firm that may affect its compliance rate can include: its size, its sector classification, its listing status and its profitability.

3.1 Listing status and disclosure compliance

Several studies have investigated the association between the listing status of a firm and its disclosure compliance (see Street and Bryant, 2000). Empirical research has indicated that the disclosure rate is higher for listed firms (Street and Bryant, 2000). This finding is attributed to the lower demand for high quality financial reporting for private firms. The shareholders of private firms have an easy access to information regarding firm’s performance and financial position. Another plausible explanation is that the controlling shareholders in private firms have incentives to hide their exploitation of minority shareholders’ wealth.


It is expected that the listed firms will comply with the disclosure requirements provided by the IFRS to a greater extent comparing to the non-listed firms. The listed firms are exposed to stricter examination by a number of regulatory bodies and various authorities, while financial analysts and a wide range of users of financial statements scrutinise the financial statements of listed firms.

The following hypothesis has been formulated and empirically tested with respect to the association between the listing status of a firm and its disclosure compliance:

H1 The rate of disclosure compliance is higher for listed firms.

3.2 Sector classification and disclosure compliance

The disclosure compliance of firms might be associated with their sector classification (Palmer, 2008). Firms classified in particular sectors might have different levels of disclosure compliance due to the special characteristics of the sector in which they belong (Wallace et al., 1994).

The following hypothesis has been formulated and empirically tested with respect to the association between the sector classification of a firm and its disclosure compliance:

H2 The rate of disclosure compliance is associated with the firm’s sector classification.

3.3 Corporate size and disclosure

According to Cooke (1989) the size of a firm – regardless to the way it is measured (e.g., total assets, sales turnover, number of shares) – is a variable that can explain, to a considerable extent, the quality of firm’s disclosures. Larger firms are expected to posses the resources that are necessary for the preparation of an event such as the introduction of IFRS (Ahmed and Nicholls, 1994; Hossain and Adams, 1995; Jones and Higgins, 2006). Furthermore, the financial statements of larger firms are more likely to be thoroughly examined and analysed by financial analysts and shareholders. As a result, considerable pressure is exercised to larger firms to improve the quality of their disclosure (Cooke, 1989; Hossain and Adams, 1995). The following hypothesis has been formulated and empirically tested with respect to the association between the size of a firm and its disclosure compliance:

H3 The rate of disclosure compliance is higher for larger firms.

3.4 Profitability and disclosure

The compliance of a firm to the disclosure requirements prescribed by particular accounting standards is affected by the profitability of the firm (Inchausti, 1997; Owusu-Ansah, 1998; Palmer, 2008). It has been hypothesised that there is a positive association between profitability and the level of disclosure (Inchausti, 1997). According to the agency theory the managers of profitable firms will disclose financial information to the external users of accounts in order to advance their interests. They will disclose detailed information in order to support the continuation of their positions and their compensation arrangements. Within the framework of signalling theory firms will have an incentive to provide to market good news in order to avoid an under valuation of firm’s stock. Wagenhofer (1990), on the other hand, argued that the less profitable


firms might increase the level of disclosure in order to explain to the market the reasons for the decline in their profitability. Palmer (2008) found limited support for the hypothesis that more profitable firms disclose more information. On the basis of the political costs theory it can be argued that the firms with large political visibility will have an incentive to disclose more information in order to justify the level of their profits (Inchausti, 1997).

When the introduction of a new or a revised accounting standard is expected to adversely affect firms’ income, companies are more concerned about issues relating to the implementation of the new standard and the way they will communicate to their shareholders their continuing underlying profitability (Jones and Higgins, 2006). Within this context is expected that the more profitable firms will have higher compliance rates than the less profitable firms (Palmer, 2008). Wallace and Naser (1995) found that the profitability of firm affects its compliance to disclosure requirements. Inchausti (1997), and Dumontier and Raffournier (1998) do not provide evidence consisted with this conclusion. Similarly, Street and Bryant (2000) do not provide evidence to support the argument that the rate of firm’s compliance is associated with its profitability.

The following hypothesis has been formulated and empirically tested with respect to the association between the profitability of a firm and its disclosure compliance:

H4 The rate of disclosure compliance is associated with the firm’s profitability.

4 Research design

4.1 Sample selection

The present study investigates the extent to which Greek firms comply with the disclosures requirements of the IFRS as well as possible exploratory factors.

The financial statements of a sample of Greek listed and non-listed firms for the financial year 2006 were examined. The year 2006 was the second year of application of IFRS for Greek firms. In order to smooth the progress of adoption of IFRS by Greek firms, in the first year of IFRS application (i.e., 2005), a number of exceptions were (unofficially) granted to firms with respect to the disclosures that they should include in their financial statements. These exceptions were over and above the exceptions allowed by IFRS1 for the first time adoption of IFRS. Therefore, if the present analysis was based on the 2005 financial statements, its results may not be indicative of the actual compliance of Greek firms.1

4.2 Data source

The disclosures included in published financial statements of sample of 32 Greek firms have been examined. In order to compare the extent of compliance of the listed vs. the non-listed firms, 16 listed and 16 non-listed ones that have adopted IFRS are included in the sample. In order to facilitate comparison between listed and non-listed firms an effort was made to choose non-listed firms that belonged to the same sectors as the listed ones. As usual, the sample does not include firms from the financial sector. The firms included in the sample of listed firms were chosen in order to be representative of the (other) main sectors of the Greek economy (see Table 1).


Table 1 Firms included in the sample

Listed Non-listed

Viohalco Ιonia

Frigoglass Mediterra

Petropoulos Nestle – ice cream

Industrial products-services

Νeorion Fage

Multirama Retail

Ab Vasipoloulos

Marinopoulos

Food-beverage Loulis EVGA

Elliniki Technodomiki Interbeton Construction-building materials

Terna Tomi

Oil and gas Motor Oil Hellas Envitec

Leisure-travel Minoan Lines Aegean Airlines

Epsilonnet Technology Forthnet

Hol

Telecommunications ΟTE Vodafone

Shipping Νaytitan

Services Sea

Energy Elektor

Media Pegasus

Chemicals Elton

Commercial vehicles Eltrac

4.3 Measurement of the variables

Previous disclosure studies have adopted various approaches in measuring disclosure. The most frequently used approach in voluntary disclosure studies is to ask a number of ‘experts’ (e.g., auditors, financial executives, etc.) which they consider to be important items to be disclosed. Another approach was to use a checklist based on legal requirements such as compliance with the EU’s 4th Company Law Directive (inter alia, Glaum, 2009). Finally, in the case of IFRS some researchers selected specific standards and checked compliance with the disclosure requirements of those standards.

The focus of this paper is compliance with the disclosure requirements of all IFRS; this would require testing whether a firm complies with more than 1,500 items which are not necessarily applicable in all sectors. Furthermore, checking the compliance of a company with all such requirements would be open to substantial bias because the authors could not be certain whether a disclosure requirement was pertinent to the specific company. On the other hand, there is a question regarding which are the most important disclosures. For this reason, this study uses the disclosures proposed in the proposed standard for small and medium sized entities. Since that document supposedly


focuses on the most important disclosure while even most Greek listed companies are medium sized by international standards (less than 500 employees) it was deemed appropriate to use it2.

For each category of disclosure it has been determined which elements should be disclosed. Subsequently it has been examined whether the sample firms made the appropriate disclosures in their annual report. An issue with scoring disclosures in financial statements is whether or not an undisclosed information item is applicable to a sample firm. Several measures have been proposed in literature for dealing with this problem. Cooke (1989) proposed annual reports to be thoroughly examined before they were scored in order to determine whether the undisclosed information items were indeed inapplicable to the companies. Furthermore, the applicability of some items was determined by logical reasoning (Owusu-Ansah, 2000). For instance, it is sensible to expect a firm to disclose its accounting policy for securities valuation, if it owns a portfolio of securities. Both measures were adopted in this study.

The disclosure compliance of a company is depicted as the value of a compliance ratio that is computed for each company. The compliance ratio is the ratio of what a company disclosed in its annual report to what it is obliged to disclose for each category of disclosure. Thus, for each sample company and for each of the 31 groups of disclosures applicable to our sample we calculated a compliance ratio. The same ratio was calculated for the total number of items of disclosure for each company in the sample. The total numbers of information items that were examined in this study is 436; however, 46 of these items were not applicable for all the firms in our sample and were excluded from the analysis3. For each item of disclosure there are three possibilities: the information item is in the annual reports (OK); the information item is not disclosed in the annual reports because it is not applicable in the particular company (non-applicable NA), and the information item is not disclosed in the annual reports despite the fact that it is applicable in the particular company and this company should disclose it (non-mentioned, NM). This approach is consistent with the need to study disclosure items while the alternative methodology advocated by Street and Gray (2001) where the disclosure index is the average of the disclosure indices computed on a per standard basis is more consistent with studying compliance with standards.

To explain compliance other variables used in the present study include:

• Listing status: whether the firm is listed in the Athens Stock Exchange.

• Industrial sector: as classified by ICAP.

• Income: the after tax income for 2006.

• Equity: the end of year total equity of the reporting firm.

• Assets: total assets.

• ROE: income divided by equity. It should be noted that in the case where equity is negative this variable is not defined.

• ROA: income divided by assets.


5 Results

5.1 Descriptive statistics

Descriptive statistics for the firms in the sample are provided in Table 2. Interestingly, no single firm fully complies with disclosure requirements while the average compliance rate is only 62.9% which indicates that almost a third of the required items are not disclosed by the firms in the sample. To evaluate whether the compliance rate is different from 100% in a statically significant senses, a one sided t-test was estimated. The conclusion is that the compliance rate is less than 100% at the 1% level of significance. Table 2 Descriptive statistics for the dependent and the continuous independent variables

Mean Median Standard deviation Min Max

Compliance rate 62.9% 64.3% 11.7% 34.2% 86.9% Income 34,651.3 2,854.0 108,087.2 –16,672.0 531,200.0 Equity 263,256.2 62,186.5 628,302.0 –1,060.6 3,249,700.0 Assets 512,009.8 142,550.5 1,229,238.0 315,817.0 6,801,400.0 ROE 12.4% 5.6% 34.4% –56.2% 154.8% ROA 1.6% 2.2% 11.1% –31.7% 28.2%

The observed compliance rate raises some questions regarding the audit quality and the regulations enforcement in Greece especially since the financial statements of the companies in our sample were not qualified for inadequate disclosure. Furthermore, certain characteristics of the Greek business environment (i.e., ownership-concentration, low law enforcement and insufficient investors’ protection) are not conducive to high levels of audit quality. Thus, the observed compliance rate of 63% can be attributed – at least to an extent – to the low audit quality in Greece. Table 3 Categories of disclosure

Count Percent

OK NM OK Investment property 32 0 100.0% Share-based payment 4 0 100.0% Consolidated and separate financial statements 88 1 98.9% Cash flow statement 221 30 88.1% Compliance with the IFRS 320 47 87.2% Balance sheet 758 173 81.4% Investments in associates 78 25 75.7% Notes to the financial statements 321 108 74.8% Income statement 358 136 72.5% Discontinued operations and assets held for sale 48 22 68.6% Events after the end of the reporting period date 46 22 67.7% Statement of changes in equity and statement of income 206 100 67.3% Investments in joint ventures 58 29 66.7%


Table 3 Categories of disclosure (continued)

Count Percent

OK NM OK Related party disclosures disclosure of relationships 276 139 66.5% Foreign currency translation 62 33 65.3% Accounting policies, estimates and errors 17 10 63.0% Income taxes 212 135 61.1% Revenue 255 175 59.3% Earnings per share 122 86 58.7% Specialised industries 188 134 58.4% Property, plant and equipment 244 187 56.6% Intangible assets other than goodwill 182 148 55.2% Financial assets and financial liabilities 360 329 52.3% Inventories 88 89 49.7% Employee benefits 283 287 49.7% Business combinations and goodwill 101 106 48.8% Leases 174 186 48.3% Government grants 49 65 43.0% Impairment of non-financial assets 73 104 41.2% Provisions and contingencies 107 224 32.3% Borrowing costs 20 44 31.3%

Table 3 presents the compliance scores by category of disclosure. The numbers in the columns OK and NM are a multiple of the number of disclosures in each category times the number of firms for which such a disclosure would be appropriate. As it can be seen, while in many cases compliance is satisfactory, in others it is below 50%.

Furthermore, the comparisons of the mean and the median of all independent variables reveal that their distributions are highly skewed. For this reason, as well as the small size of the sample, the multivariate regression model will be estimated using non-parametric techniques.

5.2 Qualitative findings

The annual reports of listed firms on overage contain a larger number of pages comparing to the annual reports of non-listed firms. This finding should not be surprising. Listed firms are usually bigger comparing to the non-listed ones, while their ownership is more widespread. As a consequence, the annual reports of listed firms are expected to satisfy the informational needs of larger and a more diverse group of users.

In summary, the main qualitative characteristics of the disclosures by the firms being studied are:

• Sample companies exhibit a high compliance rate with respect to disclosures relating to the following items: compliance to IFRS, the balance sheet, income statement, and the cash flow statement and a low one with respect to the following categories:


borrowing costs, provisions and contingencies, impairment of non-financial assets, leases, and government grants.

• There are no disclosures concerning changes in equity.

• Most firms adopt the indirect method for the preparation of the cash flow statements.

• Only a limited number of sample firms reported accounting errors in previous periods, and / or a change in accounting policy despite discrepancies between comparative data for 2005 (in the 2006 statements) and financial statements for 2005.

• Most firms do not provide adequate disclosures with respect of goodwill nor do they report information relating to the impairment test.

• Most firms do not disclose information regarding provisions.

• Many firms do not value the available for sale assets in their fair value, because they cannot determine it reliably.

• Most firms do not provide adequate disclosure with respect to the financial risk they face, and the measures that they adopt for hedging it. Generally the disclosure about financial instruments and their impact upon the income and the equity of the firm is inadequate.

5.3 Quantitative results: univariate analysis

5.3.1 Listing status and disclosure compliance

The mean compliance rate for listed firms is 69.6% and for non-listed ones 56.2%. In order to evaluate whether this difference is statistically significant a two group t-test test was run. The results suggest that the compliance rate of listed firms is significantly higher (one-sided test) at the 1% level. This can be interpreted as strong support for hypothesis 1.

This finding is consistent with the findings of previous research, which found that the listed firms have a higher level of disclosure compliance (see, Ball and Shivakuram, 2005; Burgstahler et al., 2006) but is inconsistent with the results of Buzby (1975) and Fekete et al. (2008) who did not find a significant association between the listing status of the firms and their disclosure compliance.

5.3.2 Sector classification and disclosure compliance

In Table 4 the disclosure compliance rates for firms classified by sector (for sectors with more than one firms) are presented. However, the statistical analysis of the influence of sector on compliance rates with such a detailed classification of firms in sectors is impossible, given the size of the sample. For this reason, firms were aggregated in four groups: industrial, commercial, service and other. Subsequently, a three group (companies classified in the ‘other’ group were excluded from the analysis) median test was run in order to evaluate whether the influence of sector is statistically significant. The results suggest that the compliance rate doesn’t differ, in a statistically significantly level, among sectors. This finding is consistent with the conclusions of Inchausti (1997) and Palmer (2008). Thus, univariate analysis doesn’t support hypothesis 2.


Table 4 Average values of compliance ratios per sector

Sector Compliance rate

Leisure travel 67.8% Industrial product-services 67.3% Telecommunications 67.1% Construction and building materials 65.5% Retail 65.5% Oil and gas 62.6% Technology 57.8% Food and beverage 57.9%

5.3.3 Corporate size and disclosure

Correlation analysis was used to test the relationship between size, measured by the book value of equity and that of assets and the rate of disclosure compliance. In Table 5 the relevant Spearman correlation coefficients are presented. As it can be clearly seen, the rank correlation coefficient between both measures of size used in the present study, book value of equity and assets, and the compliance rate are positive and significant at the 5% level. This provides strong evidence in favour of hypothesis 3 that the rate of compliance is higher for bigger firms. This result is consistent with the findings of previous research (see, Dumontier and Raffournier, 1998; Jones and Higgins, 2006; Lang and Lundholm, 1993; Clarkson et al., 2003). In particular, for Greek firms, Vrentzou (2005) found that their size is positively associated with the level of voluntary disclosure.

This finding is consistent with the theoretical argument that larger firms posses the resources that are necessary for the preparation of fully IFRS-compliant financial statements (Ahmed and Nicholls, 1994; Hossain and Adams, 1995; Jones and Higgins, 2006). Table 5 Coefficients of correlation among compliance rate and size measures

Compliance rate Equity

Equity 0.69* Assets 0.67* 0.92*

5.3.4 Profitability and disclosure

As outlined earlier, a positive association between profitability and the level of disclosure has been hypothesised. Correlation analysis was used to test the relationship between profitability, measured either as accounting income, return on equity (ROE) or return on assets (ROA) and the rate of disclosure compliance. It should be noted that two companies were excluded from the correlation analysis between ROE and disclosure compliance due to the fact that their equity was negative. The relevant Spearman correlation coefficient between Income and the Compliance rate, presented in Table 6, is positive and significant at the 5% level while it is positive but not significant in the case of ROE and ROA. This provides some evidence in favour of hypothesis 4 that the level of compliance is associated with profitability.


These results are consistent with the political costs theory which suggests that firms with large political visibility will have an incentive to disclose more information in order to justify the level of their profits (Inchausti, 1997). They are also consistent with agency theory, i.e., that the managers of profitable firms will disclose financial information to the external users of accounts in order to support the continuation of their positions and their compensation arrangements, however, this is unlikely to be the case since the ownership of most of the firms in the sample is concentrated and therefore managers need only to explain their performance to a few powerful block holders and not to the general investing public. Table 6 Coefficients of correlation among compliance rate and profitability measures

Compliance rate Income ROE

Income 0.49* ROE 0.16 0.71* ROA 0.33 0.81 0.92*

5.4 Multivariate tests

Multiple regression analysis was used for multivariate testing of the hypotheses; the dependent variable, compliance rate, was regressed against the independent variables of Size (as measured by assets), Profitability (as measured by accounting income) and dummy variables for listing status and industry sector. Assets were chosen as a proxy for size in order to be consistent with previous studies.

Given the small size of the sample, the skewed distribution of the explanatory variables and therefore the possible presence of outliers that would make the analysis unreliable, a non-parametric estimation technique was used, namely quantile regression (Koenker and Hallock, 2001). This technique differs from traditional OLS because instead of minimising the sum of squared residuals, the objective function is to minimise the mean absolute deviation (MAD). Regression results are presented in Table 7. Panel A reports estimated coefficients and standard errors for the full sample, while panels B and C for the listed and non-listed sub-samples correspondingly. Table 7 Regression of size, profitability, listing status and sector on disclosure compliance

Constant Income Assets Listed Industrials Service

Panel A: full sample 56.31* 3.80 0.19 9.62* 3.74 4.30 (pseudo R2 = 0.31) (2.95) (29.28) (2.90) (2.80) (3.08) (4.30) Panel B: listed firms 63.49* –66.30 5.65 9.90* 5.35** (pseudo R2 = 0.20) (1.90) (49.18) (4.10) (2.38) (2.88) Panel C: non-listed 49.29* –77.93 11.75 10.12 14.13 (pseudo R2 = 0.20) (7.85) (70.17) (9.66) (8.49) (11.54)

Notes: *Significant at 5% level, **significant at 10% level

The multiple regression model estimated for the full sample indicates that the only significant variable is listing status confirming univariate analysis’ results. Interestingly, the influence of size is not statistically significant even if we do remove the estimated


equation the dummy variable for listing status. Thus, there is strong evidence supporting hypothesis H1.

In the listed firms subsample at the 5% level there is strong evidence supporting hypotheses H2 since the dummy variable for industrial firms is significant at the 5% level and the one for service firms at the 10% level. The influence of sector is significant only for the group of industrial firms in the full sample. Thus, there is limited evidence in support of H2.

Results for non-listed firms indicate that there is no statistically significant variable explaining the variation in the disclosure rates. In the latter case, compliance with disclosure requirements may be explained by auditor size or ownership structure.

Finally, the results for profitability are intriguing; the coefficient on profitability is negative in both subsamples but not statistically significant. This result indicates that more profitable firms, ceteris paribus, comply less with disclosure requirements in contradiction to hypothesis H4. This result differs from findings using univariate analysis. A possible explanation for the result is that more profitable firms, ceteris paribus, can finance their operations from sources other than the stock market and do not feel strong pressure to satisfy the information needs of investors.

6 Conclusions

The introduction of IFRS set a new accounting framework for Greek firms. The objective of IFRS is to establish a common basis for the preparation of annual reports internationally and to improve the quality of the information provided through the published financial statements. The present study aims to investigate the compliance of Greek firms to the IFRS disclosure requirements using a sample 32 Greek firms – 16 listed and 16 non-listed – for the year 2006. This is particularly important since various environmental factors in Greece act against compliance while there is a worldwide debate regarding enforcement and consequently quality of accounting information.

In line with the findings of other disclosure studies, the univariate analysis indicated that larger firms exhibit higher compliance rates. Similarly, the listing status of a firm appears to be associated with the extent to which it complies with the disclosure requirements provided by the IFRSs. Although the disclosure compliance of certain non-listed firms is not low, the listed firms on average exhibit significantly higher disclosure rates. On the other hand, the profitability of a firm and its sector classification do not appear to be statistically significant variables in explaining disclosure compliance.

Substantial effort remains to be made in order to achieve a complete compliance with the requirements set by IFRS. In particular, auditors do not seem to qualify the financial statements of firms that do not comply with the disclosure requirements.

The present study is subject to some limitations. First, the creation of a disclosure index treats all disclosure items as having the same importance, without taking into consideration the relative importance of each disclosure item. Furthermore, the relative small number of companies included in the sample necessitates the use of non-parametric methods and does not allow a more specific sector classification than the four sectors used in this study. This provides an opportunity for further investigation of the research question utilising a larger sample which would allow, inter alia, industry to be classified into more specific categories than the four categories used in this study.


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Notes 1 For two of non-listed companies in our sample, 2006 is the first year of IFRS application. 2 To minimise the error variance, the disclosure checklist accompanying the proposed standard

was used as research instrument while one of the researchers was responsible for collecting the data. The other author checked the scoring of a sample of items. No material differences were detected. Finally, the authors discussed the disclosure scores with a senior member of the Greek auditing profession who agreed that the level of disclosure were in line with his experience.

3 For example, disclosures regarding financial statements in hyperinflationary economies have no application in Greece.

Documents

An empirical investigation of Greek firms' compliance to IFRS disclosure requirements